No Tax on Overtime in 2026: How the Overtime Deduction Works

The One Big Beautiful Bill Act did not make overtime pay tax-free. It created a deduction for "qualified overtime compensation" that lowers your federal taxable income when you file your return. The IRS is explicit that overtime is still part of your gross income and still counts as wages for payroll taxes.

The deduction applies to tax years 2025 through 2028. You claim 2026 overtime on Schedule 1-A of the return you file in 2027, the new schedule that also handles the tips, car loan interest, and senior deductions. You do not need to itemize: the deduction is available whether you take the $16,100 standard deduction or itemize.

Two things follow. First, your paycheck does not change on its own, because your employer still withholds income tax on overtime as usual. Second, the deduction saves you your marginal federal rate on the deductible amount, typically 12% or 22% for hourly workers, not the full amount of your overtime.

Only overtime required under section 7 of the Fair Labor Standards Act counts. In practice that means you must be a non-exempt employee covered by the FLSA, the kind of worker who must be paid at least time-and-a-half for hours over 40 in a workweek. Many hourly workers in retail, manufacturing, health care, warehouses, and the trades fit this description.

If you are exempt from FLSA overtime, which covers many salaried managers and professionals, you cannot claim the deduction even if your employer pays you overtime under a union contract, a state law, or company policy. Federal workers can check their status on their SF-50, where an "N" in the FLSA category box means overtime-eligible.

Overtime that goes beyond what the FLSA requires does not qualify either. If your employer pays a premium for hours past 8 in a day, for weekend shifts, or for holidays, only the part the FLSA would have required is deductible. Your employer has to work that out and report it.

The deduction covers the pay above your regular rate, not your whole overtime check. At $20 an hour, time-and-a-half pays $30 for each overtime hour. The first $20 is straight-time pay and stays fully taxable. Only the extra $10 per hour is qualified overtime compensation.

Double time works the same way. The IRS example uses a worker paid twice the regular rate for 10 overtime hours: the FLSA required only the extra half, so only that half counts, and the second premium the employer chose to pay is ordinary taxable wages.

Starting with 2026 pay, employers must report qualified overtime on Form W-2 in box 12 with code TT. That figure is the starting point on Schedule 1-A. If the box 12 amount is wrong, ask your employer for a corrected W-2c; the IRS says you cannot substitute your own estimate on Form 4852.

The table assumes a single filer working 40 regular hours plus steady overtime every week for 52 weeks, paid at time-and-a-half, with no other income and the standard deduction. Savings are federal income tax only.

Take the first row. At $20 an hour with 5 overtime hours a week, base pay is $41,600 and overtime pay is $7,800, for total wages of $49,400. The deductible premium is $2,600, and because this worker's top dollars are taxed at 12%, the deduction saves $312 for the year.

The $25 row saves $1,280 on a $6,500 deduction, more than 12% of that amount, because the deduction pulls part of the income back down out of the 22% bracket. At $35 an hour with 8 overtime hours, the $7,280 premium is all taxed at 22%, so the saving is $1,602.

The last row shows the cap. At $50 an hour with 10 overtime hours, the premium reaches $13,000, but a single filer can deduct only $12,500. At a 24% marginal rate that saves $3,000. To see what these wages mean for your actual paycheck, try the hourly take-home pay calculator.

The cap is $12,500 of qualified overtime per return, or $25,000 on a joint return. Head of household filers use the $12,500 limit. The deduction is gradually reduced once modified adjusted gross income passes $150,000 for single filers or $300,000 for joint filers, and higher earners lose it entirely.

You need a Social Security number that is valid for employment and was issued before your return's due date. An ITIN does not qualify. If you are married, you must file a joint return to claim the deduction, so married filing separately rules it out.

Schedule 1-A walks through the math: you enter the qualified overtime from your W-2, apply the $12,500 or $25,000 limit, then apply any income-based reduction. The result carries to Form 1040 as a deduction separate from the standard deduction.

By default, the deduction shows up as a smaller tax bill or a bigger refund when you file. The IRS says employers may not cut withholding for expected overtime deductions unless you give them an updated Form W-4.

The 2026 Form W-4 handles this in Step 4(b). Line 1b of its Deductions Worksheet asks for an estimate of your qualified overtime, the "and-a-half" portion only, up to $12,500 ($25,000 if married filing jointly) if your total income is under $150,000. Our W-4 guide shows that a $12,500 entry on a $75,000 salary cuts federal withholding by about $90 per biweekly paycheck.

Estimate conservatively. If your overtime dries up mid-year and you have already lowered withholding, you could owe at filing time. Recheck your W-4 whenever your schedule changes.

Social Security and Medicare still apply to every overtime dollar. The 7.65% combined employee rate comes out of the full $7,800 of overtime in the first example, straight time and premium alike, and the deduction does nothing about that.

State income tax is a separate question. Each state decides whether to follow the federal deduction, so overtime may still be fully taxable on your state return. Check your state's current rules before you count on any state savings, and use the hourly to salary converter to see what regular overtime adds to your annual pay.

Workers who also earn tips can stack this deduction with the separate tips deduction, each with its own cap. See our guide to no tax on tips for those rules.